Prabhudas Lilladher has issued a BUY rating on R R Kabel, setting a target price of Rs 2,151, indicating a potential upside of over 40% from the current market price of Rs 1,505. Despite challenges in the wires and cables (W&C) segment due to subdued volume growth and margin pressure, the company anticipates recovery driven by infrastructure demand and expansion in emerging sectors. Prabhudas Lilladher highlights growth potential in the fast-moving electrical goods (FMEG) sector and expects improvements in EBITDA margins and profitability over the coming fiscal periods.

Key Financial Highlights

Revenue Growth: R R Kabel reported a 12.5% YoY revenue increase for Q2FY25, reaching Rs 18.1 billion. This growth was primarily driven by a modest 11.1% YoY growth in the W&C segment, despite a temporary decline in demand and inventory destocking in channels.

EBITDA Margin Compression: EBITDA fell by 29% YoY to Rs 858 million, with margins contracting by 280 basis points to 4.7%, largely due to rising raw material costs and lower W&C volume growth.

Profit After Tax (PAT): PAT declined by 33.2% YoY to Rs 495 million, impacted by shrinking W&C EBIT margins and losses in the FMEG segment.

Segment Analysis

Wires and Cables (W&C) Segment: The W&C segment achieved a 3.8% YoY volume growth. Domestic demand increased by nearly 10%, although export volume growth was hindered by shipping delays and high base effects.

Fast-Moving Electrical Goods (FMEG) Segment: The FMEG segment grew by 24.1% YoY, driven by stronger sales of fans and switches. Despite an EBIT loss of Rs 117 million, improvements in product mix and cost efficiency have reduced losses, and the company aims for EBITDA breakeven in FMEG by FY26.

Margin Outlook and Efficiency Improvements

EBITDA Margin Guidance: The management projects an EBITDA margin of 8-8.5% in H2FY25 for the W&C segment, driven by cost optimizations and steady domestic demand.

Capacity Utilization and Expansion: Current capacity utilization stands at 90-95% for cables and 65-70% for wires. The company plans to expand its power cable capacity by 100% and wire capacity by 20-25% by FY25 to capture anticipated demand growth.

Strategic Focus Areas

Domestic Market Positioning: With a targeted approach in premium and mid-premium products within the FMEG space, R R Kabel is focusing on increasing domestic market penetration, particularly through new product launches.

Infrastructure and Export Opportunities: R R Kabel is positioning itself to capitalize on growing infrastructure investments in India and is targeting export markets to drive additional growth. Export revenue currently accounts for approximately 30% of total W&C sales.

Outlook and Valuation

Prabhudas Lilladher projects a revenue CAGR of 21.8% and PAT CAGR of 32.5% from FY24 to FY27, supported by robust infrastructure demand, expansion in premium FMEG products, and enhanced operational efficiencies. The revised target price of Rs 2,151, reflecting a 40% upside, is based on a valuation of 8.5x FY26 estimated EPS. The recommendation remains a strong BUY for long-term investors looking for exposure in the electrical and infrastructure sectors.